MIDEAST MONEY-Egypt bourse struggles under heavy hand of government

Reuters Middle East

* Market's worries as much about regulation as economy

* Investors suspect government unsympathetic to market

* May be settling political scores, raising money for


* But inexperienced government may be on learning curve

* Some recent signs suggest it's becoming more benign

By Ulf Laessing

CAIRO, April 24 (Reuters) - Egyptian fund manager Mohamed

Ayad watched his clients lose money for months until he himself

became a victim of the stock market's slump.

"I was fired with many others when trading volumes went

down," said Ayad, a man in his 30s who worked for a securities

firm in Cairo until last year. "I have been unable to find a new

job as many other people working in the financial sector have

also been laid off."

Over two years after Egypt's revolution ousted president

Hosni Mubarak, the stock market continues to sag, plagued by

sluggish trading turnover, a lack of new equity issuance and the

reluctance of many big foreign investors to commit money.

The effect is being felt well beyond the community of

finance professionals in Cairo and Alexandria - the market is

viewed as a barometer for business confidence, and its weakness

is preventing companies from using it to raise money.

Although Egypt's economy is struggling, the market's

problems are as much political as economic. Investors feel the

government is unsympathetic to them, and inclined to intervene

in the market to obtain money or settle political scores.

Two official decisions this month have raised hopes that the

government's approach to the market is changing, and that it can

reach an accommodation with investors. But the decisions will

need to be followed by the resolution of other long-running

issues for confidence to return, analysts and investors say.


After Mubarak's overthrow the Muslim Brotherhood, which took

the lion's share of political power, mounted a public relations

campaign to reassure investors that its Islamist ideology did

not conflict with their desire to make money.

By late last year the campaign appeared to be working; the

main stock index, which halved in the months after the

revolution, had recovered almost two-thirds of those losses.

But early this year, a series of regulatory incidents hit

the market. One was a clash between authorities and Orascom

Construction Industries, the market's largest stock.

In late February the Egyptian Financial Supervisory

Authority (EFSA) intervened to suspend a multi-billion dollar

offer for Orascom's Amsterdam-listed affiliate OCI NV

to buy out the shares of the Cairo-listed company. The EFSA said

it wanted more information about the transaction, which could

result in Orascom being delisted from Cairo.

Then in early March, the government slapped a travel ban on

Orascom chief executive Nassef Sawiris and his father Onsi

Sawiris - two of the country's most prominent businessmen - in a

probe into alleged tax evasion by the company.

Later that month, authorities spooked the market by imposing

a new tax covering investment gains on an offer by Qatar

National Bank (QNB) to buy shares in National Societe

Generale Bank (NSGB) - and telling shareholders about

the tax only after they had agreed to sell.

Taken together, the incidents suggested the government's

attitude to the market was not as benign as it had claimed. A

fledgling recovery of foreign fund inflows into the market was

halted; the index is down 11 percent from its January peak.

The market is still debating authorities' motives. One

theory is that the government, with its budget deficit

officially projected to rise to 197.5 billion Egyptian pounds

($28.5 billion) in the fiscal year that will start on July 1, is

increasingly desperate to raise money - and that it sees the

market as a tempting source of cash.

If this theory is right, the government may be disappointed.

Much of the money it raises in the short term could be lost in

the long term as investors become more reluctant to trade stocks

and companies shy away from listing their shares on the market.

"They make less than $10 million, $9 million from this tax,

a very small amount for making all this trouble," said Karim

Abdelaziz, who manages an Egyptian share fund worth 1 billion

pounds at Cairo-based al-Ahly Fund & Portfolio Management.

Another possibility is that as Brotherhood-backed President

Mohamed Mursi consolidates power, his administration is becoming

more eager to settle political scores with businessmen who

prospered under the old regime. The Sawiris, and wealthy stock

market investors, fall in that category.

In the long run, that strategy could also be

counter-productive, by deterring the business investment which

Egypt needs to create jobs and repair its economy - and which

the Muslim Brotherhood will need to retain its political


Abdelaziz said the Orascom tax case could lead to a lengthy

court battle, which would risk scaring off more investors who

were already concerned about land sales that have been revoked

by the government. Authorities accuse some real estate firms of

having paid too little for land because of cosy relationships

with officials in the Mubarak era.

A third theory is that officials making decisions affecting

the stock market, some of them new to government after being

excluded from power by Mubarak, are simply too inexperienced -

or perhaps too distracted by other challenges - to make policies

with investor confidence in mind.

Hani Helmy, chairman of El Shorouq Brokerage in Cairo, said

the government was too busy dealing with street violence, fuel

shortages and power cuts to focus on helping the stock market.

"I think since the revolution until now...the stock exchange

is not a priority to deal with - maybe we are number 10, number

20," he said.


There have been two signs this month that authorities'

approach toward the market may be becoming more benign.

One was an announcement by the EFSA that the stock exchange

would reinstate the buying and selling of individual stocks

within the same trading session from the first week of May, in

an effort to boost market volumes.

Buying and selling a stock in the same day has been banned

since the revolution destabilised the market in February 2011.

EFSA head Ashraf El Sharkawy said the resumption would increase

the number of transactions by between 30 and 40 percent and help

to alleviate "huge liquidity problems" on the exchange.

By itself, the opportunity to trade stocks more frequently

will not restore investors' faith in the government - but it

does suggest that within the government, there are still

officials working to improve market conditions.

The second positive sign was a decision by parliament's

economic and financial committee to scrap the tax on investment

gains and return to investors the money already levied on the

NSGB deal.

Abdullah Shahata, an aide to the finance minister, told

Reuters that members of parliament had decided the tax would

have a "negative effect on the investment climate in Egypt".

Daniel Broby, chief investment officer of British-based Silk

Invest, said the tax saga should be seen as part of a learning

curve in economic management for Mursi, and was not a bad omen

for the market in the long run.

"The tax imposed on stock market gains...is the sort of

knee-jerk reaction that inexperienced politicians typically make

and regret," he said.

At least two more things may need to happen for the market

to feel comfortable with the government. One is a resolution of

the Orascom tax dispute; Orascom said on Tuesday it was "in an

advanced stage of negotiations with the Egyptian Tax Authority

and will announce more details within the coming few days".

The other thing is for the government to give clearance for

a merger of Cairo-listed EFG-Hermes, the Middle East's

largest investment bank, with QInvest of Qatar. The

deal was originally signed on May 4 last year; a clause in the

agreement states it will lapse after 12 months if regulatory

approval is not forthcoming.

The merger is politically sensitive in Egypt because both of

EFG's chief executives, Hassan Heikal and Yasser El Mallawany,

are accused by authorities of illegal share dealings in relation

to a 2007 transaction, along with the two sons of ousted

Mubarak. EFG has said it will defend the CEOs.

Uncertainty over whether the deal will go ahead has weighed

on EFG's share price and caused concern about Egypt's relations

with Qatar, which has promised billions of dollars of badly

needed financial aid to Cairo.

If such issues are resolved and confidence in the regulatory

environment revives, Egypt's fast-growing population of 84

million could make its stock market attractive. Some

institutions are already planning based on that assumption.

"We plan to open five to six branches in the provinces in

the Nile Delta and Upper Egypt in the next three years to

attract retail investors," said Hussein Choucri, chairman of

local firm HC Securities & Investment, which manages

assets worth almost 5 billion pounds in 14 investment funds.

Fund manager Helmy said a Muslim Brotherhood victory in this

year's parliamentary elections, which are expected as early as

October, might actually calm the market by giving parliament a

mandate to take difficult economic decisions.

"People would accept the Brotherhood for the first two

years, and judge them afterwards," he said.